Australian Securities and Investments Commission v Franklin

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 123 of 2014

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

WALTON CONSTRUCTION PTY LTD (ACN 060 900 218) (IN LIQ)

WALTON CONSTRUCTION (QLD) PTY LTD (ACN 100 833 225) (IN LIQ)

JUDGES: JESSUP, ROBERTSON AND WHITE JJ DATE OF ORDER: 18 JULY 2014 WHERE MADE: MELBOURNE

1. The Australian Securities and Investments Commission be given leave to commence the appeal against the fourth and fifth respondents.
2. The parties are to confer and, by no later than close of business on 22 July 2014, to file and serve minutes of the orders necessary to give effect to the conclusion that Messrs Franklin, Horne and Stone be removed as liquidators of Walton Construction Pty Ltd and Walton Construction (Qld) Pty Ltd; and as to costs.
3. Otherwise, the appeal be dismissed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 123 of 2014

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

WALTON CONSTRUCTION PTY LTD (ACN 060 900 218) (IN LIQ)

WALTON CONSTRUCTION (QLD) PTY LTD (ACN 100 833 225) (IN LIQ)

JUDGES: JESSUP, ROBERTSON AND WHITE JJ DATE: 18 JULY 2014 PLACE: MELBOURNE

Jessup J 1 I have had the benefit of reading in draft the reasons of Robertson and White JJ. In relation to the issues with which their Honours respectively deal, I agree with those reasons. I concur in the making of the orders proposed by White J. I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Jessup.

Associate: Dated: 18 July 2014 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 123 of 2014

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

WALTON CONSTRUCTION PTY LTD (ACN 060 900 218) (IN LIQUIDATION)

WALTON CONSTRUCTION (QLD) PTY LTD (ACN 100 833 225) (IN LIQUIDATION)

JUDGE: ROBERTSON J DATE: 18 JULY 2014 PLACE: MELBOURNE

Introduction 2 This appeal concerns two main issues. The first is whether the primary judge erred in holding that there was no apprehended or perceived lack of independence or impartiality on the part of the liquidators of Walton Construction Pty Ltd (in liq) and Walton Construction (Qld) Pty Ltd (in liq) (the companies), the liquidators being the first, second and third respondents. The second issue is whether the primary judge erred in holding that the first to third respondents as administrators of the companies, before becoming the liquidators of the companies, did not contravene s 436DA of the Corporations Act 2001 (Cth). The appellant (ASIC) also sought leave to begin and proceed with the appeal against the companies.

First issue and application for leave 3 I have had the advantage of reading the reasons of White J on the first issue and I agree with those reasons. I also agree with the orders proposed by White J.

Second issue 4 ASIC submitted that the primary judge erred in holding that the first to third respondents, as administrators of the companies, did not contravene s 436DA of the Corporations Act. ASIC submitted that the primary judge should have held that the first to third respondents did contravene s 436DA in failing to give full reasons why they believed that the referral relationship between Messrs Knapp, McCurry and Kirzner, Mawson Group Holdings, Mawson Business Advisory and Mawson Restructures (collectively, the Mawson Group) and Lawler Draper Dillon (LDD), in the context of the need for the first to third respondents as administrators to investigate entities associated with the Mawson Group, did not result in the first to third respondents having a conflict of interest or duty. ASIC also sought a declaration that the first to third respondents had contravened s 436DA. 5 Section 436A(1) provided that a company may, by writing, appoint an administrator of the company if the board has resolved to the effect that: (a) in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and (b) an administrator of the company should be appointed. 6 By s 436E(1) the administrator of a company under administration must convene a meeting of the company's creditors in order to determine whether to appoint a committee of creditors and, if so, who are to be the committee's members. By s 436E(2), the meeting must be held within 8 business days after the administration begins. By s 436DA(3), the administrator must give a copy of each declaration of relevant relationships (DIRRI) to as many of the company's creditors as reasonably practicable and do so at the same time as the administrator gives those creditors notice of the first meeting of creditors referred to in s 436E. By s 436E(4), at the first meeting of creditors, the company's creditors may also pass a resolution removing the administrator from office and appointing someone else as administrator of the company. 7 By s 439A, the administrator of a company under administration must convene a further meeting of the company's creditors to decide the company's future. At that meeting, by s 439C(c), the creditors may resolve that the company be wound up. In that event, the company is taken by s 446A(2) to have passed at that time a special resolution under s 491 that the company be wound up voluntarily and, by s 446A(3), s 497 is taken to have been complied with in relation to the winding up and, unless the creditors at that meeting appoint a person to be liquidator, the creditors are taken by s 499(2A) to have appointed the administrator of the company to be liquidator for the purpose of winding up the affairs and distributing the property of the company. 8 As set out below, by s 436DA(5) there is an obligation to make a replacement DIRRI where a DIRRI at a later time has become out-of-date or the administrator becomes aware of an error in the DIRRI. 9 The relevant parts of s 436DA provided as follows: 436DA Declarations by administrator - indemnities and relevant relationships Scope (1) This section applies to an administrator appointed under section 436A …. Declaration of relationships and indemnities (2) As soon as practicable after being appointed, the administrator must make: (a) a declaration of relevant relationships; and (b) a declaration of indemnities. Note: Failure to comply with this subsection is an offence (see subsection 1311(1)). Notification of creditors (3) The administrator must: (a) give a copy of each declaration under subsection (2) to as many of the company's creditors as reasonably practicable; and (b) do so at the same time as the administrator gives those creditors notice of the meeting referred to in section 436E. Note: Failure to comply with this subsection is an offence (see subsection 1311(1)). (4) The administrator must table a copy of each declaration under subsection (2) at the meeting referred to in section 436E. Note: Failure to comply with this subsection is an offence (see subsection 1311(1)). Updating of declaration (5) If: (a) at a particular time, the administrator makes: (i) a declaration of relevant relationships; or (ii) a declaration of indemnities; under subsection (2) or this subsection; and (b) at a later time: (i) the declaration has become out-of-date; or (ii) the administrator becomes aware of an error in the declaration; the administrator must, as soon as practicable, make: (c) if subparagraph (a)(i) applies - a replacement declaration of relevant relationships; or (d) if subparagraph (a)(ii) applies - a replacement declaration of indemnities. Note: Failure to comply with this subsection is an offence (see subsection 1311(1)). (6) The administrator must table a copy of a replacement declaration under subsection (5): (a) if: (i) there is a committee of creditors; and (ii) the next meeting of the committee of creditors occurs before the next meeting of the company's creditors; at the next meeting of the committee of creditors; or (b) in any other case - at the next meeting of the company's creditors. Note: Failure to comply with this subsection is an offence (see subsection 1311(1)). Defence (7) In a prosecution for an offence constituted by a failure to include a particular matter in a declaration under this section, it is a defence if the defendant proves that: (a) the defendant made reasonable enquiries; and (b) after making these enquiries, the defendant had no reasonable grounds for believing that the matter should have been included in the declaration. 10 The relevant part of s 60 was in the following terms: 60 Declaration of relevant relationships Administrator (1) In this Act, a declaration of relevant relationships, in relation to an administrator of a company under administration, means a written declaration: (a) stating whether any of the following: (i) the administrator; (ii) if the administrator's firm (if any) is a partnership - a partner in that partnership; (iii) if the administrator's firm (if any) is a body corporate - that body corporate or an associate of that body corporate; has, or has had within the preceding 24 months, a relationship with: (iv) the company; or (v) an associate of the company; or (vi) a former liquidator, or former provisional liquidator, of the company; or (vii) a person who is entitled to enforce a security interest in the whole, or substantially the whole, of the company's property (including any PPSA retention of title property); and (a) if so, stating the administrator's reasons for believing that none of the relevant relationships result in the administrator having a conflict of interest or duty. 11 The definition of "associate" on which ASIC relied was in the following terms: 15 General (1) The associate reference includes a reference to: (a) a person in concert with whom the primary person is acting, or proposes to act; and (b) a person who, under the regulations, is, for the purposes of the provision in which the associate reference occurs, an associate of the primary person; and (c) a person with whom the primary person is, or proposes to become, associated, whether formally or informally, in any other way; in respect of the matter to which the associate reference relates. (2) If the primary person has entered, or proposes to enter, into a transaction, or has done, or proposes to do, any act or thing, in order to become associated with another person as mentioned in an applicable provision of this Division, the associate reference includes a reference to that other person. 12 The DIRRIs were in the following terms: i. Circumstances of Appointment Mr Franklin had one meeting with Mr. C. Walton, the company's director, on 27th September 2013 for the purposes of discussing the financial position of the company and the insolvency options available. We received no remuneration for this advice. This does not affect our independence for the following reasons: • The courts and the IPA's Code of Professional Practice specifically recognise the need for practitioners to provide advice on the insolvency process and the options available and do not consider that such advice results in a conflict or is an impediment to accepting the appointment. • This meeting … set out the insolvency options available, the process involved in each option and the ramifications under alternative options. The advice will not influence our ability to be able to fully comply with the statutory and fiduciary obligations associated with the voluntary administration of the company in an objective and impartial matter [sic]. ii. Relevant relationships (excluding professional services to the insolvent) … iv. No other relevant relationships to disclose The [companies were] referred by Mr. P. McCurry of Mawson Group, who refers us insolvency type matters from time to time. Referrals from solicitors, business advisors and accountants are common place and do not impact on our independence in carrying out our function as Administrators. Other than this, there are no other known relevant relationships, including personal, business and professional relationships, from the previous 24 months with the company, an associate of the company … that should be disclosed. 13 The primary judge held that the evident policy of the provision was to ensure the integrity and transparency of the appointment process by requiring administrators to disclose to creditors any existing or prior associations with the company or its associates. Disclosure served to alert creditors to associations that may be a ground for disqualifying the administrator. This policy objective was made clear by the explanatory memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth). The explanatory memorandum explained that the 2004 Parliamentary Joint Committee on Corporations and Financial Services Report, Corporate Insolvency Laws: A Stocktake (the PJC Report) and the 1998 Corporations and Markets Advisory Committee Report, Corporate Voluntary Administration (the CAMAC Report) had both recommended that the government should consider introducing new disclosure requirements to address concerns about the independence of administrators. The specific recommendations were to the effect that administrators should be required, upon their appointment, to disclose any professional, business or personal association with the company. Recommendation 1 of the PJC Report stated: The Committee recommends that the law should require administrators to make available a statement of independence before the first meeting of creditors disclosing any professional, personal or business relationship between the administrator or his/her firm and the company or its officers, members or creditors. There should be provision for appropriate sanctions for false or misleading statements. Further, the Committee recommends that the administrator be under an obligation to disclose conflicts of interest if and when they arise. Recommendation 36 of the CAMAC Report stated: All administrators (whether appointed under s 436A, 436B or 436C) should be required to table a statement of interest at the first meeting of creditors. The statement should disclose any professional, personal and business relationships of the administrator and his or her firm with the company or its officers, members or creditors that the administrator knew or should have discovered upon reasonable inquiry, including as an accountant or other professional adviser (other than the relationship arising merely from the company's request that the person be an administrator). 14 The primary judge said the explanatory memorandum stated that it was proposed "to address concerns about the independence of administrators by requiring administrators to declare any 'relevant relationships'" which "will allow creditors to make a more informed decision about whether to replace the administrator": at [4.71]. Paragraphs [4.72] and [4.73] state: 4.72 The declarations will be provided to creditors with the notice of the first meeting of creditors. The categories of relationship that an administrator is required to declare are targeted around those parties that have the power to initially appoint an administrator. While conflicts may arise due to relationships with other parties, it considered that a relationship with these parties would pose a particular concern for creditors, and as such the administrator should be required to disclose them and explain why they do not amount to a conflict of interest or duty. While a conflict may not arise at law, the existence of such a relationship may be one factor for creditors to take into account when considering whether to replace the administrator. A key theme of the reforms in this Bill is to provide creditors with better information and more power to manage external administration processes. 4.73 The question of whether a 'relevant relationship' exists between an administrator and another person will be a matter of fact and degree. However, the term should be interpreted in light of the object of the provision to alert the creditors to relationships that may not give rise to a conflict, but which may be relevant in considering whether to replace the administrator. This would include relationships where a conflict might be perceived to exist in the absence of full disclosure. It does not require the disclosure of trivial interpersonal connections. 15 The primary judge said the legislation enacted gave effect to that policy by imposing the duty on administrators to disclose relationships, whether or not they were potentially disqualifying, coupled with the duty to provide reasons as to why those relationships did not, in the administrator's view, result in a conflict of interest or duty. The declaration thus provided an important safeguard for creditors, if only because they were entitled to assume that any professional, personal or business relationship between the administrator or his/her firm and the company or its associates will be disclosed to them. 16 The primary judge said the issue in the present case concerned the adequacy of disclosure in the declarations in view of the likely need to investigate the involvement of the Mawson Group in transactions entered into by the companies in administration, of which the administrators were, or became, aware whilst the companies were still under administration. ASIC argued that the declarations were deficient because creditors were not alerted to the fact that there may be a need for the administrators to investigate the firm that referred them work. ASIC argued that the creditors "needed to know" that the Mawson Group may be investigated to enable them to make an informed decision about whether to replace the administrators. 17 The primary judge said the text of s 60 prescribed in clear language that a declaration must state whether the administrator or his or her firm has, or has had (within the preceding 24 months), "a relationship" with the company or, relevantly, its associates. "If so", the administrator must state his or her reasons for believing why that "relationship" does not "result in" the administrator "having a conflict of interest or duty". The section thus contained two requirements: (1) the requirement to disclose relationships with the company or its associates; and (2) the requirement to explain why those relationships do not disqualify the administrator from acting as administrator. 18 In the present case, the primary judge held, the liquidators disclosed their firm's business association with the Mawson Group and explained why the referral relationship did not compromise their independence in carrying out their function as administrators. ASIC's argument that the liquidators had to address why the need for investigation did not result in any conflict was no more than to state a conclusion about the possibility of a conflict of interest or duty because there was the relationship with the Mawson Group. 19 The primary judge held the need to investigate the Mawson Group was a matter pertaining to the performance of the administrators' duties, and in her Honour's view, did not objectively add anything further as to whether the existence of the association with the Mawson Group may give rise to any conflict of interest or duty or, to put it another way, might be seen to undermine the independence and impartiality of the liquidators in the discharge of their duties as administrators. If there were any conflict of interest or duty, it was founded in the referral relationship, the nature of which was disclosed. 20 Her Honour refused the declaration sought by ASIC. 21 ASIC submitted that each of Messrs Knapp, McCurry and Kirzner, Mawson Group Holdings, Mawson Business Advisory and Mawson Restructures was an "associate" of the companies, satisfying (v) of s 60(1)(a), as it or he was "a person in concert with whom the primary person is acting, or proposes to act" (s 15(1)(a)) and/or "a person with whom the primary person is, or proposes to become, associated, whether formally or informally, in any other way" (s 15(1)(c)), in respect of the matter to which the associate reference relates. 22 ASIC submitted that Messrs Franklin, Stone and Horne contravened s 436DA in failing to give in the declarations or in replacement declarations full reasons why they believed that the referral relationship between Messrs Knapp, McCurry and Kirzner, Mawson Group Holdings, Mawson Business Advisory and Mawson Restructures and LDD, in the context of the need of Messrs Franklin, Stone and Horne to investigate entities associated with the Mawson Group, did not result in the administrators having a conflict of interest or duty. 23 ASIC submitted that the second sentence of the DIRRIs under the heading "No other relevant relationships to disclose", which purported to disclose the administrators' reasons for believing that the relationship did not result in their having a conflict of interest or duty, was inadequate as it did not explain a critical aspect (of this relationship in this administration) - why the need to investigate transactions involving the Mawson Group with whom they had a prior referral relationship, which was a matter that on its face gave rise to a conflict of interest or duty, did not give rise to a conflict. 24 ASIC submitted it was common ground that the administrators were aware of the need to investigate transactions involving the Mawson Group at least by 15 October 2013, the date of the first creditors' meeting. For example, it was an agreed fact that at least by 15 October 2013 the administrators were aware that in the course of their appointment they would need to investigate six transactions and knew of eight links between the parties to those transactions and the Mawson Group. Accordingly, it was submitted, there was at least the need to update the DIRRIs, an obligation which continued throughout the period of administration. 25 ASIC submitted that the primary judge drew an erroneous distinction between "matters pertaining to the performance of the administrators' duties", and "matters which might be seen to undermine the[ir] independence and impartiality". With reference to the statement of the primary judge that s 60 did not require disclosure of the need to investigate the Mawson Group because that "was a matter pertaining to the performance of their duties, and … did not objectively add anything further as to whether the existence of the association with the Mawson Group may give rise to any conflict of interest or duty or, to put it another way, might be seen to undermine the independence and impartiality of the liquidators in the discharge of their duties as administrators", ASIC submitted that the need to investigate the Mawson Group was a key aspect of the conflict of interest or duty that arose. To deny the requirement to disclose that fact was to emasculate the provision. 26 The first to third respondents submitted that the primary judge made no error in this regard. The DIRRIs satisfied the statutory requirements. The deficiency in the DIRRIs alleged by ASIC was that the administrators failed, as part of the reason for their beliefs, to explain why the need to investigate transactions involving the Mawson Group did not give rise to a conflict. However, they submitted s 60 did not require administrators to give explanations in these DIRRIs about matters which may or may not require investigation. That was a matter the administrators might have been expected to address in a subsequent report to creditors under s 439A(4)(a). This was not surprising because in most cases it could not be reasonably expected that an administrator would have sufficient information regarding the company at the time of execution of the DIRRI to make such a statement. Even in a case where the administrator, at the time of signing the DIRRI, might have some awareness of the need to investigate a transaction, on no reading of s 60 would he or she be required to make a statement to that effect in the DIRRI unless it were relevant to why the administrator believed that his or her prior relationship with a relevant entity did not give rise to a conflict. 27 In its written reply, ASIC submitted that s 60 did not always require administrators to explain in DIRRIs matters which may or may not require investigation. However, ASIC submitted, in the circumstances of this administration there was a need to disclose why the need to investigate pre-appointment transactions involving Mawson Group-related entities did not give rise to a conflict of interest or duty. Contrary to the liquidators' contention, this was relevant because the question of the existence of a conflict of interest or duty could not be answered meaningfully absent any reference to it.

Consideration 28 It is necessary first to identify and then to keep clearly in mind whether or not there is or has been a relationship and, if so, what it is. 29 The word "relationship" is not relevantly defined in the Corporations Act. In my opinion the provision means that there is an obligation to state the connection between the relevant entities: the administrators on the one hand and the company or an associate of the company on the other. A bare intention to investigate a transaction of an entity does not, in my opinion, constitute a relationship between the relevant entities. 30 It is also necessary, in my opinion, to note that s 60 does not require the administrator to disclose relationships between the company and the associates of the company but only relationships between the administrator and the company, and relationships between the administrator and an associate of the company. 31 Importantly, in my opinion the requirement to state a relationship does not cover the entire field of conflict of interest or duty. It is only where there has been or is a relationship that the obligation to state the administrator's reasons for believing that the relevant relationship does not result in the administrator having a conflict of interest or duty arises. It is not permissible, in construing the provision, to reason that because an investigation or proposed investigation into a transaction may result in the administrator having a conflict of interest or duty that, therefore, there is a relationship between the entities. 32 Implicit, at least, in the submissions of ASIC is that any step of investigation an administrator has taken or proposes to take into a transaction or transactions gives rise to a relationship between the administrator and the relevant entity which engaged in that transaction or those transactions. For the reasons I have given, I do not accept that submission. 33 In oral submissions ASIC put that the administrators had to give reasons as to why it was that there was no perception of a lack of independence in circumstances where they were investigating a person in respect of which they had a material referral relationship and a person which was involved in their appointment. 34 I do not accept this submission. It seems to me that it expands the obligation on an administrator beyond the requirement of s 60(1)(b) that the declaration state the administrator's reasons for believing that none of the relevant relationships result in the administrator having a conflict of interest or duty. The focus of that provision is on the administrator's belief. The provision then proceeds by reference to the reasons for that belief. 35 In my opinion, the Court should not give to the provision the wide construction for which ASIC contended where a breach of the provision constitutes an offence: see s 1311 of the Corporations Act. 36 I therefore agree with the primary judge to the extent that her Honour said that the need to investigate the Mawson Group was a matter pertaining to the performance of the administrators' duties and did not objectively add anything further as to the existence of the association with the Mawson Group. 37 It therefore becomes unnecessary to consider any question of remedies. One such question would be whether, in the exercise of the Court's discretion, it would have been appropriate to make a declaration in respect of the past conduct of the liquidators where the conduct took place at the time they were the administrators. A further such question, which was not fully argued, would be whether, in the exercise of the Court's discretion, it would have been appropriate to make a declaration in respect of conduct which would constitute an offence. 38 I should add that I do not regard the Insolvency Practitioners Association of Australia's guide entitled Code of Professional Practice for Insolvency Practitioners, on which ASIC relied, as extrinsic material appropriate or permitted to be taken into account in construing ss 60 and 436DA of the Corporations Act. To my mind, the general law would not permit that guide to be taken into account in construing those provisions and that guide is outside the scope of s 15AB of the Acts Interpretation Act 1901 (Cth). For example, the relevant parts of that guide were not reproduced or referred to in the explanatory memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth). 39 I would dismiss this ground of appeal. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Robertson.

Associate: Dated: 18 July 2014 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 123 of 2014

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

JUDGES: JESSUP, ROBERTSON AND WHITE JJ DATE: 18 JULY 2014 PLACE: MELBOURNE

White J 40 On 8 November 2013, the creditors of Walton Construction Pty Ltd (WCPL) resolved that it should be wound up and that the first three respondents (Messrs Franklin, Horne and Stone) of the accounting firm Lawler Draper Dillon (now PKF Lawler) (LDD) be appointed joint and several liquidators. 41 At a meeting of a related company, Walton Construction (Qld) Pty Ltd (WCQPL), held in Brisbane on the same day, its creditors also resolved that it should be wound up and that Messrs Franklin, Horne and Stone be appointed as its liquidators. 42 Prior to their respective appointments as liquidators, the respondents had on 3 October 2013 been appointed as administrators of each company. 43 Although WCPL and WCQPL are the fourth and fifth respondents to this appeal, I will refer to Messrs Franklin, Horne and Stone as "the respondents", except when it is necessary to do otherwise. 44 On 16 December 2013, the Australian Securities and Investments Commission (ASIC) commenced proceedings in this Court seeking, first, a declaration that the respondents had, following their appointment as administrators of WCPL and WCQPL, contravened s 436DA of the Corporations Act 2001 (Cth) (the Corporations Act). ASIC alleged that the respondents had failed to comply with their obligation to make proper disclosure in the declarations of independence and relevant relationships (commonly known as a "DIRRI") which they provided to the creditors of each of WCPL and WCQPL. 45 Secondly, ASIC sought orders for the removal of the respondents as liquidators of the two companies (and new liquidators appointed in their place) on the ground of a reasonable apprehension that the respondents lacked independence and impartiality in the discharge of their functions. ASIC did not assert an actual lack of independence and impartiality, only a reasonable apprehension that those circumstances existed. 46 In the conduct of its case, ASIC gave greater attention to the second aspect and the primary Judge addressed the case on that basis. The Judge dismissed both parts of ASIC's application: Re Walton Construction Pty Ltd (in liq); ASIC v Franklin [2014] FCA 68. ASIC now appeals to this Court against that decision.

Background 47 WCPL was involved in the construction industry in Victoria and New South Wales, and WCQPL in the construction industry in Queensland. At material times, Craig Walton has been the sole director and secretary of each company. It was Mr Walton who, in his capacity as director, appointed the respondents as administrators of the two companies on 3 October 2013. 48 At the first creditors' meeting of each company (held separately but contemporaneously on 15 October 2013), the respondents as administrators reported that the two companies had faced financial difficulties in the previous 18 months and that, in about March or April 2013, each company had retained the Mawson Group to provide advice about its options. 49 The Mawson Group provides, amongst other things, business advisory and restructuring services. Mawson Group Holdings Pty Ltd (MGH) is the holding company in the group. Its wholly owned subsidiaries include Mawson Business Advisory Pty Ltd (Mawson Advisory) and Mawson Restructures and Workouts Pty Ltd (Mawson Restructures). The directors of MGH at relevant times were Julian Kirzner, Stephen Knapp and Patrick McCurry. They were also the directors of Mawson Advisory and Mawson Restructures. Mr Phillip Spry was, at relevant times, an employee in the Mawson Group. 50 Shortly before the appointments of the administrators, WCPL and WCQPL entered into a number of transactions with entities created, owned and/or directed by persons connected with the Mawson Group. Those transactions included: (1) An Asset Sale Agreement (ASA) dated 20 September 2013 by which Lewton Asset Services Pty Ltd (Lewton) acquired a significant portion of WCPL's business, including construction contracts. The effective consideration provided by Lewton was the assumption of some of WCPL's liabilities. Lewton was incorporated on 6 August 2013. Its director is a Mr Daniel Casey and its office and registered place of business the same as those of the Mawson Group. Lewton is wholly owned by RIU Pty Ltd. The evidence did not disclose the owners of the shares in RIU Pty Ltd. (2) An ASA dated 30 September 2013 by which Tantallon Constructions Pty Ltd (Tantallon), then known as Peloton Builders Pty Ltd, acquired a significant part of WCQPL's business, including construction contracts. Again, the consideration provided by Tantallon was the assumption of some of WCQPL's liabilities. Tantallon was incorporated on 27 June 2012 and its registered office is the same as that of the Mawson Group. Its sole director is Mr Kirzner. He was replaced as a director on 24 September 2013 (shortly before the ASA was executed), but resumed that office on 13 November 2013 (shortly after the second creditors' meeting of WCQPL). Tantallon is majority-owned by RZL-Holdings (Qld) Pty Ltd (RZL). RZL's sole director is Mr McCurry, but Mr Spry was a director from 5 August 2013 to 12 November 2013. RZL is a wholly owned subsidiary of Mawson Beneficiary Pty Ltd (Mawson Beneficiary), whose directors are Mr Kirzner, Mr Knapp and Mr McCurry. 40% of the shares in Mawson Beneficiary are owned by Staple Elements Pty Ltd, the sole director and shareholder of which is Mr Kirzner; 40% by Peemac Corporation Pty Ltd (Peemac), the sole director and shareholder of which is Mr McCurry; and 20% by Stenala Pty Ltd (Stenala), the sole director and shareholder of which is Mr Knapp. (3) A Deed of Arrangement dated 18 September 2013 by which an inter-company debt of $18.9 million said to be owed by WCPL to WCQPL was assigned, for a consideration of $30,000, to QHT Investments Pty Ltd (QHT). QHT, which is a wholly owned subsidiary of Providence Growth Solutions Pty Ltd (Providence Growth), has as its sole director Mr McCurry. The directors of Providence Growth are Mr McCurry and Mr Knapp. Peemac and Stenala own 80% and 20% respectively of the shares in Providence Growth. (4) A Deed of Assumption, and Specific Security Deeds, dated 23 September 2013 between WCPL, WCQPL, Lewton Maintenance Services Pty Ltd (LMS) and Lewton Maintenance Services (Queensland) Pty Ltd (LMSQ). Lewton is the sole shareholder in LMS, which was incorporated on 6 August 2013. Mr Casey is also the director of LMS. The registered office and principal place of business of LMS are the same as those of the Mawson Group. Tantallon is the sole shareholder in LMSQ (which was incorporated on 5 August 2013) and Mr Casey its sole director (although Mr Kirzner was a director from 5 August 2013 until 12 September 2013). The registered office and principal place of business of LMSQ are the same as those of the Mawson Group. 51 ASIC noted that the two ASAs involved the transfer of contracts for 31 projects with a total estimated completion cost of $61 million and an estimated revenue of $56 million, in addition to all relevant assets of WCPL and WCQPL, including business records, intellectual property, plant and equipment, stock and the benefit of statutory licences. It also noted that Mr Walton provides "consultancy services" to Lewton and Tantallon. 52 ASIC contends, and the respondents themselves have acknowledged, that these pre-administration transactions require investigation by the liquidators of WCPL and WCQPL. ASIC is concerned that the only consideration under the two ASAs was the assumption of some liabilities, and that the only consideration for the assignment of a debt with a face value of $18.9 million was $30,000. It considers that the transactions may be "phoenix" transactions, because they had the effect of shifting assets from an insolvent company into a new company, of transferring some of the creditors of the insolvent company into the new company, and of leaving little or no assets for distribution to the remaining creditors of the insolvent company. It seems that at this stage the estimated asset deficiencies of WCPL and WCQPL are of the order of $58 million and $27 million respectively. 53 It is in these circumstances that ASIC regards the pre-administration transactions as raising matters for investigation. ASIC considers, in particular, that it will be necessary for the liquidators of WCPL and WCQPL to investigate, vigorously and independently, whether some or all of these transactions are voidable as uncommercial transactions under s 588FB of the Corporations Act, or voidable as unreasonable director-related transactions under s 588FDA of the Corporations Act; whether Mr Walton, as director of each of WCPL and WCQPL, breached his duties under ss 180-184 of the Corporations Act and as imposed by the common law; and whether members of the Mawson Group were involved in such breaches (under s 79 of the Corporations Act, or under either limb of Barnes v Addy (1874) 9 LR Ch App 244). In particular, ASIC considers that it will be necessary for the liquidators to examine the conduct of members of the Mawson Group and of persons involved in that group, both because the Mawson Group had worked with WCPL and WCQPL before their collapses, and because the entities which had entered into the pre-administration transactions with WCPL and WCQPL were created, owned or controlled by persons connected with Mawson. ASIC noted in this respect that it would largely be a matter for the liquidators' discretion as to how "fiercely" they investigated or litigated any claims arising out of the pre-administration transactions. 54 It is convenient to address first the ground relating to the alleged reasonable apprehension of bias. ASIC contends that that apprehension arises because of the respondents' conflict of interest and because of their "closeness" to the Mawson Group.

Reasonable apprehension of bias by a liquidator: general principles 55 Section 503 of the Corporations Act provides that the Court may "on cause shown" remove a liquidator appointed in a voluntary winding up and appoint another liquidator. The words "cause shown" are not to be construed narrowly. An applicant for removal may rely on any conduct or inactivity by a liquidator ranging from moral turpitude to bias, lack of independence, incompetence or other unfitness for office: Domino Hire Pty Ltd v Pioneer Park Pty Ltd [2003] NSWSC 496 at [58]; (2003) 21 ACLC 1,330 at 1,340. The overall considerations are the interests of the liquidation and the purpose for which the liquidator was appointed: Domino Hire at [58]-[63], 1,340-1. 56 Lehane J observed in Wood v Targett (1997) 23 ACSR 291 at 298-9 that the discretion under s 503 will commonly be exercised in favour of removal of a liquidator when it appears that the liquidator, through relationships and connections with the company, its management or particular persons concerned in its affairs, is in a position of actual or apparent conflict of interest. Lehane J gave examples in the authorities of the exercise of the discretion in these circumstances, namely, Aboriginal and Torres Strait Islander Commission v Jurnkurakurr Aboriginal Resource Centre Aboriginal Corp (in liq) (1992) 10 ACSR 121; Re Club Superstores Australia Pty Ltd (in liq) (1993) 10 ACSR 730; Re Biposo Pty Ltd (1995) 17 ACSR 730 and Advance Housing Pty Ltd (in liq) v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230. 57 An appearance of bias arising by association is a recognised category of disqualification: Webb v The Queen (1994) 181 CLR 41 at 74. It arises when the apprehension of bias results from some direct or indirect relationship, experience or contact with a person or persons interested in a matter. 58 The guiding principle is that a liquidator must be independent and be seen to be independent: Re Queensland Stations Pty Ltd (in liq) (1991) 9 ACLC 1,341 at 1,344; Re National Safety Council of Australia [1990] VR 29 at 34; Advance Housing at 233-4. In Re Chevron Furnishers Pty Ltd (in liq) (No 2) [1995] 1 Qd R 125 at 130, Fitzgerald P, Pincus JA and Williams J said: The liquidator must have had no prior or other involvement either with the company in liquidation, its directors and major shareholders, or one of its creditors so that he could not fairly and impartially carry out his duties as liquidator requiring him, in broad terms, to act in the best interests of the general body of creditors. However, as Santow J observed in Advance Housing at 234, some previous involvement by the liquidator may be permissible: In my judgment, the correct balance is struck by permitting a liquidator to act as such even if there be a prior involvement with the company in liquidation, provided that involvement is not likely to impede or inhibit the liquidator from acting impartially in the interests of all creditors or be such as would give rise to a reasonable apprehension on the part of a creditor that the liquidator might be so impeded or inhibited. In short the question should be whether there would be a reasonable apprehension by any creditor of lack of impartiality on the liquidator's part in the circumstances, by reason of prior association with the company or those associated with it, including creditors, or indeed any other circumstance. 59 It was common ground at first instance, and on the appeal, that the test for apprehended bias in a liquidator is the same as that which applies to the judiciary and to administrative decision makers. That is the test stated by the majority in Ebner v Official Trustee in Bankruptcy [2000] HCA 63 at [6]; (2000) 205 CLR 337 at 344, namely, whether "a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the resolution of the question the judge is required to decide". Gleeson CJ, McHugh, Gummow and Hayne JJ went on to say (at [8], 345) that the application of this test requires two steps: First, it requires the identification of what it is said might lead a judge (or juror) to decide a case other than on its legal and factual merits. The second step is no less important. There must be an articulation of the logical connection between the matter and the feared deviation from the course of deciding the case on its merits. The bare assertion that a judge (or juror) has an "interest" in litigation, or an interest in a party to it, will be of no assistance until the nature of the interest, and the asserted connection with the possibility of departure from impartial decision making, is articulated. Only then can the reasonableness of the asserted apprehension of bias be assessed. 60 The "double might" test stated in Ebner has been regarded as relatively undemanding and, on occasion, has been described as "Spartan". Nevertheless, the degree of independence and impartiality to be expected of a decision maker may differ from one statutory context to another. As Spigelman CJ observed in McGovern v Ku-ring-gai Council [2008] NSWCA 209 at [11]; (2008) 72 NSWLR 504 at 508, "the judicial paradigm is not universally applicable". Similarly, this Court observed in Cabcharge Australia Ltd v Australian Competition and Consumer Commission [2010] FCAFC 111 at [27] that, "although the test for apprehended bias is ordinarily the same wherever it arises, the precise language used in applying the test has frequently varied depending on the context in which it falls to be applied". This means, in the present case, that particular regard must be had to the position of liquidators in a voluntary winding up. 61 Liquidators are officers of the court and are, accordingly, expected to conduct themselves with independence, impartiality and integrity. However, questions of bias in relation to liquidators arise in a context which differs in material respects from that of the judiciary or administrative decision makers. Liquidators are themselves engaged in business in a competitive environment. They have to attract work. This makes it almost inevitable that they will develop contacts and relationships with those who are actual or prospective sources of referrals. Further, the success or otherwise of liquidators will depend in part on their maintaining good professional reputations. 62 All liquidators, both those who are appointed by a court and those conducting voluntary liquidations, are subject to review by ASIC, and, ultimately, by the courts. 63 The public interest in judges not recusing themselves too readily would not appear to be so strong in the case of liquidators. A decision by a liquidator to decline an appointment, whether too readily or otherwise, will not ordinarily raise a matter of public interest. 64 In my opinion, knowledge of these circumstances pertaining to liquidators can be imputed to the hypothetical reasonable fair-minded observer.

ASIC's claim of a reasonable apprehension of bias 65 ASIC contended that the test for a reasonable apprehension of bias was satisfied in the present case by reason of a combination of circumstances. As already noted, it submits that a reasonable apprehension that the respondents lack impartiality arises because they have a conflict of interest, and that a reasonable apprehension that they lack independence arises from the closeness of their relationship with the Mawson Group. 66 As to the conflict of interest, ASIC noted that the Mawson Group had, in the period of 18 months or so before October 2013, regularly referred work to LDD and that that work had realised a not insignificant amount of fee income. It contended that LDD must have an expectation of receiving further referrals, giving rise to an apprehension that it may not wish to put the prospect of further income in jeopardy. 67 As to the closeness of the respondents to the Mawson Group, ASIC referred to a number of circumstances. First, that LDD has a "referral relationship" with the Mawson Group and that as part of that relationship it had been the Mawson Group which had recommended the respondents to WCPL and WCQPL as administrators. In addition, it was Mr McCurry who had contacted Mr Franklin on about 26 September 2013 and had arranged for him to attend a meeting with Mr Walton on 27 September 2013. ASIC contended that the Mawson Group must have appreciated at the time that the pre-administration transactions would be investigated, as would their own conduct, and yet it had recommended and facilitated the appointment of those who would carry out the investigation. 68 The first respondent, Mr Franklin, had one meeting with Mr Walton, on 27 September 2013, shortly before he resolved that the two companies should be placed into administration. Mr Franklin described that meeting as being for the purposes of discussing the financial position of the companies and the insolvency options available. ASIC did not suggest that, by itself, the meeting with Mr Walton was significant, but contended that the fact that the meeting was held at the offices of the Mawson Group and was attended by Mr Spry, an employee of the Mawson Group, was material to the reasonable apprehension of bias it alleges. 69 In relation to both aspects of the alleged apprehension of bias, ASIC referred to two matters. It submitted that the apprehension of a fair-minded lay observer would be heightened by what it said were shortcomings in the disclosures made by the respondents to the creditors of each of WCPL and WCQPL, and by some statements which indicated a seemingly benign view by the respondents about some of the pre-administration transactions. 70 Secondly, ASIC emphasised the evidence indicating that some at least of the creditors of WCPL and WCQPL had raised concerns about the independence and impartiality of the respondents in acting as liquidators of the companies.

The decision of the Judge 71 The primary Judge rejected ASIC's claim concerning bias. The Judge considered that a fair-minded observer, appropriately informed, would be aware that it is the statutory duty and responsibility of liquidators to discover whether any transactions are voidable, whether there was unlawful conduct, and whether there was conduct giving rise to civil or criminal liability (at [8]). The Judge also considered that a fair-minded observer, appropriately informed, would know that LDD is commonly referred voluntary administrations and other insolvency work by solicitors, business advisers and accountants; that this was the nature of the firm's relationship with the Mawson Group; that the Mawson Group is a business advisory firm providing corporate restructuring advice to troubled companies; that its relationship with WCPL and WCQPL was "a professional one"; and that there was nothing about the conduct of other insolvencies referred by the Mawson Group to LDD which brought the firm's independence and impartiality into question (at [9]). 72 The primary Judge concluded at [9] that, with this imputed knowledge, the fair-minded observer "may reasonably conclude" that the respondents would discharge their statutory duties and responsibilities impartially and as required by law, uninfluenced by their relationship with the Mawson Group. The Judge also rejected the submission that any deficiencies in the DIRRIs provided by the respondents to creditors would have given rise to a "heightened" apprehension of bias (at [9]).

An error in approach? 73 ASIC submitted that, in reaching her decision concerning the alleged apprehension of bias, the primary Judge had misstated the principle to be applied and had thereby erred. The Judge commenced her consideration of ASIC's submission by saying (at [2]): It is settled law that a liquidator may be disqualified from continuing to act in the winding up of a company where the hypothetical fair-minded observer would perceive a lack of independence or impartiality on the part of the liquidator in the discharge of his or her functions, even where independence and impartiality have in fact been maintained. (Emphasis added) Later, at [6], the Judge said: The test for determining whether a hypothetical fair minded observer would apprehend a lack of independence and impartiality requires the articulation of a logical connection between the matters which, it is said, may impede or inhibit the liquidators from acting impartially in the interests of all creditors in the discharge of their duties and the feared deviation from discharging their duties and responsibilities impartially … (Emphasis added) Earlier, at [4], the Judge said: ASIC argued that these circumstances give rise to a reasonable perception or apprehension that the liquidators would not bring an impartial and unprejudiced mind to the investigation of the pre-administration transactions, and would favour interests associated with the Mawson Group at the expense of the interested creditors, whether consciously or not … (Emphasis added) The passage at [4] is, in my opinion, less significant for present purposes because the Judge was reciting, accurately, the terms of one submission made by ASIC's then counsel. 74 The use of the word "would" in [2] and [6] is inconsistent with the "double might" principle derived from Ebner. There are, however, some passages in the reasons which are more consistent with that principle. In [1], the Judge summarised ASIC's application by saying that it sought the removal of the respondents because of an apprehension that they "may" lack independence and impartiality; in [6], the Judge referred to the need for an articulation of the logical connection between the matters which it is said "may" impede or inhibit the liquidators from acting impartially; and, in [7], the Judge referred to the submission of ASIC that the nature and character of the respondents' business association with the Mawson Group provided the logical connection giving rise to a reasonable apprehension that the respondents "may not" act impartially in the discharge of their duties and responsibilities. As already noted, the Judge concluded at [9] that the fair-minded observer "may" reasonably conclude that the liquidators would discharge their responsibilities impartially. 75 Thus, it can be said that there are passages in the Judge's reasons which are both consistent, and inconsistent, with the "double might" test. In my respectful opinion, the passages in [2] and [6], quoted above, are significant. The Judge was there setting out the principle and the test which she considered had to be applied and, in effect, directing herself as to the law to be applied. It is reasonable to suppose that the Judge acted in accordance with the principle and the test which she had identified. Further, it is pertinent, in my opinion, that although the Judge concluded at [9] that the fair-minded observer "may reasonably conclude" that the respondents would discharge their responsibilities impartially, the Judge did not address the question of whether that same fair-minded observer "might" reasonably apprehend that the respondents "might not" discharge their responsibilities with independence and impartiality. 76 The respondents sought by two means to avoid the conclusion that the primary Judge had erred in principle. They contended that the word "would" is the "semantic and linguistic equivalent" of the proposition "might reasonably be expected to". That is to say, the word "would" conveys something in the language of probability which is more than a very remote possibility, but far less than certainty. The respondents then submitted that no sensible distinction could be drawn between the concepts of possibility and reasonable expectation, with the effect that the use by the primary Judge of the word "would" was not indicative of error. In support of this submission, the respondents referred to Commissioner of Taxation of the Commonwealth of Australia v Peabody (1994) 181 CLR 359 at 385 in which, in reference to the expression "might reasonably be expected to", the High Court said: A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable. (Citation omitted) 77 In my respectful opinion, this submission of the respondents cannot be upheld. Plainly enough, the High Court in Peabody was drawing a distinction between a reasonable expectation, on the one hand, and a possibility, on the other. The "double might" test is concerned with possibility, and not reasonable expectation. As Mahoney JA observed in Australian National Industries Ltd v Spedley Securities Ltd (in liq) (1992) 26 NSWLR 411 at 439, there is "a distinction between an apprehension that the judge might not be impartial and an apprehension that he will certainly, will probably, or will likely not be impartial". Similarly, in Ebner at [7], 345, the majority said that the question is "one of possibility (real and not remote), not probability". 78 Secondly, counsel for the respondents emphasised the importance of regard to the actual operation and application of the test rather than to its semantic form. He referred in this respect to this Court's judgment in Cabcharge at [28] and to the reasons of Basten JA in McGovern at [110]-[111], 526. One may readily accept that this is so but, for the reasons already given, this does not seem to be a case in which a judge, while stating the test incorrectly, nevertheless applied it correctly. 79 Accordingly, I consider, with respect, that the primary Judge did err in principle, and that the error, by itself, warrants reconsideration of the decision by this Court. 80 In fairness to the Judge, it is appropriate to record that there are passages in Re Biposo Pty Ltd (1995) 17 ACSR 730; Domino Hire Pty Ltd v Pioneer Park Pty Ltd [2003] NSWSC 496; (2003) 21 ACLC 1,330 and Accord Pacific Holdings Pty Ltd v Gleeson [2011] NSWSC 1021, to which the Judge referred, which can be regarded as authorities for the principle as stated by her. It is also appropriate to observe that some of the written and oral submissions of counsel for ASIC at first instance were couched in terms of the apprehension which a reasonable lay observer would have, in the circumstances, rather than the apprehension which such an observer might have. 81 Nevertheless, it is the "double might" test stated in Ebner which is to be applied. That was common ground between the parties. I note that in McGovern, Spigelman CJ at [3], 507, with whom Campbell JA agreed at [236], 553, concluded that the Judge at first instance had applied an incorrect test by asking whether the decision-maker would, rather than might, not be impartial and that this amounted to appellable error. Similarly, this Court in Cabcharge at [21]-[23] held that it had been an error for the Judge at first instance to have enquired whether a fair-minded lay observer must reasonably apprehend that the Judge might not bring an impartial mind to bear on the issues. However, it is also pertinent to note that in each of McGovern and Cabcharge, it was held that the primary Judge had nevertheless reached the correct conclusion. 82 The evidence before the Judge was largely documentary. Although Mr Horne and Mr Stone were cross-examined on aspects of their respective affidavits, the Judge did not make findings concerning their evidence, and it was not suggested on the appeal that any of their evidence should not be regarded as reliable.

Reconsideration 83 I summarised earlier the matters which, in combination, ASIC relied upon for its contention that a fair-minded observer might reasonably apprehend that the respondents might not act independently and impartially in the liquidation. 84 ASIC submitted that the respondents had a "referral relationship" with the Mawson Group which they would not wish to jeopardise, and that therein lay an interest conflicting with the proper discharge of their duties as liquidators. 85 The conflict was said to be between the respondents' interest in receiving further referrals of insolvency work from the Mawson Group and the revenue which that work would generate, on the one hand, and their duty as liquidators, on the other, having regard to their responsibilities to the creditors of WCPL and WCQPL, and to the public interest. Consideration of the view of the hypothetical fair-minded observer in a case of this kind requires analysis of the interest said to give rise to the conflict and of the effect which that interest may have on the discharge of the respondents' duties. It is necessary to keep firmly in mind that there must be a real, and not merely theoretical, possibility of conflict of duty or interest. 86 Mr Horne accepted that LDD had a "referral relationship" with the Mawson Group. He deposed that the firm had, in early 2012, formed "a professional relationship" with the Mawson Group pursuant to which "a representative of Mawson would contact either myself or Mr Franklin directly and organise a meeting to discuss a potential appointment". Mr Horne also identified the "projects" referred to LDD since the "referral relationship" with the Mawson Group had commenced. 87 However, the evidence did not provide any further detail regarding the relationship. In particular, it did not suggest that the respondents and the Mawson Group had reached some form of agreement or understanding that the latter would, from time to time, refer business to LDD, or that LDD actively solicited the referrals, or that it engaged in other forms of activity to procure the referrals. Nor did the evidence indicate whether LDD was the only firm to which the Mawson Group made referrals of this kind. Rather, the evidence indicated only that the Mawson Group did, from time to time, refer matters to the respondents' firm. Accordingly, the expression "referral relationship" appears to refer only to the practice of the Mawson Group referring "projects" to LDD from time to time. 88 Mr Horne did say that LDD utilised referrals from a number of sources so as to ensure that its income was not overly reliant on referrals from any one source. The Australian Taxation Office (ATO) and the Australian Financial Services Authority were responsible for the largest number of referrals, comprising approximately 25% of all referrals, in the two year period before 3 October 2013. It may be implicit in this statement of Mr Horne that ASIC does solicit referrals from entities such as the Mawson Group, but Mr Horne was not questioned on this topic. 89 The Mawson Group commenced referring work to LDD in about February 2012. In addition to WCPL and WCQPL, its referrals had led to members of LDD being appointed as administrators and/or liquidators of six companies. These constituted about 2% of the referrals to LDD in the two year period between 3 October 2011 and 3 October 2013. It is evident that at least one of the referrals involved a large administration. 90 In the 2012 financial year, the revenue of LDD from referrals from the Mawson Group (about $500,000) comprised just under 10% of the revenue of the firm's insolvency division, and some 4.4% of the firm's overall revenue. In the 2013 financial year, revenue from the Mawson Group's referrals (about $250,000) comprised a little over 5% of the revenue of LDD's insolvency division, and a little under 2% of the firm's overall revenue. 91 ASIC submitted that these amounts and proportions would be regarded by the fair-minded observer as significant and, given that the Mawson Group had only recently commenced making the referrals to LDD, the respondents had a material financial interest in not jeopardising the prospect of further referrals. It was this financial interest which was said to give rise to the conflict of interest. 92 Counsel for the respondents submitted that both the amounts and the proportions of the fees generated by LDD from the Mawson Group referrals were modest, and, accordingly, were not of a kind to give rise to a real conflict of interest. He emphasised that LDD received referrals from a variety of sources. Counsel also submitted that the fair-minded observer would have regard to the circumstance that it is common for firms such as LDD to receive referrals of work from other entities and to a circumstance to which Mr Horne deposed, namely, that it has not been uncommon for LDD, during the course of a liquidation, to investigate transactions involving those who had referred companies to the firm. This included transactions involving the ATO and, in one case, a firm of Melbourne lawyers. The respondents submitted that this was an ordinary feature of liquidations and well understood by those in the liquidation field. 93 Mr Horne also deposed that, in relation to two previous administrations or liquidations, LDD had engaged Ernst & Young to conduct a review of sales to determine whether they had been made bona fide and for market value. Mr Horne said that a similar exercise would be undertaken in the present case. In his cross-examination, Mr Horne rejected the proposition that the third party advice in the previous cases had been sought because LDD was concerned about its own independence: he said that LDD considered both transactions to be bona fide but wished to have its opinion confirmed, especially as in one case the subject of the transaction was a matter on which LDD did not have expertise. 94 In my opinion, knowledge of matters of these kinds can be imputed to the hypothetical fair-minded observer, save only that it would be going too far to infer that the observer would also know that the respondents intended, as a matter of fact, to adopt the course of engaging independent advisors in this case. 95 On the other hand, I do not consider that the fair-minded observer would regard remuneration of the order of that received by LDD from the Mawson Group's referrals as modest. Most creditors of companies such as WCPL and WCQPL are likely to regard amounts such as $250,000 and $500,000 as significant and the hypothetical fair-minded observer is likely to have the same view. At the very least, the fair-minded observer might apprehend that LDD may not wish to put their continued receipt of income of these proportions in jeopardy. That is especially so in the circumstance that the "referral relationship" had only recently been formed and that the number of referrals had been slowly increasing. Hence, I conclude that ASIC has established that the reasonable fair-minded observer might consider that LDD had an interest which conflicted with their duties. I will return to the consequences of this finding after considering the other matters upon which ASIC relied. 96 ASIC drew attention to the circumstance that three of the previous referrals from the Mawson Group to LDD had also involved pre-administration transactions between the company in question and entities created, owned or controlled by the Mawson Group. It contended that the fair-minded observer might perceive that the Mawson Group had a particular business model in this respect, and that this was relevant to the assessment of the perception of such an observer. 97 In my respectful opinion, ASIC's submissions did not make clear how that could be so. ASIC did not contend that the respondents or LDD were parties to the postulated business model, or that they were participants in its implementation. ASIC did not lead any evidence suggesting that the respondents had not properly investigated the pre-administration transactions in the earlier referrals so as to support an inference that the like transactions in the case of WCPL and WCQPL may not be properly investigated. Evidence of that kind would appear in any event to be tendency evidence to which s 97 of the Evidence Act 1995 (Cth) refers, and ASIC had made no attempt to comply with the requirements of that section in relation to tendency evidence. 98 It is also far from clear that knowledge of the pre-administration transactions which had occurred in the case of the other referrals could be imputed to the fair-minded observer. 99 In my opinion, it is not possible to attach any significance to this aspect of the Mawson Group referrals to LDD. 100 As to the closeness of the relationship between LDD and the Mawson Group, ASIC relied again on the existence of the referral relationship. However, apart from the evidence about the number of referrals and the period during which they occurred, there was, as I have said, very little primary evidence about how the relationship worked in practice, and how it was sustained. Account has already been made of the financial interest to which the relationship gave rise. Accordingly, it is difficult, in my opinion, to conclude that the fair-minded observer would attach any additional significance to the existence of the relationship. 101 ASIC relied on the circumstance that it was the Mawson Group which had recommended the respondents to WCPL and WCQPL, and that this had led to their appointments as administrators. As noted earlier, it was Mr McCurry who contacted Mr Franklin on about 26 September 2013, and Mr Franklin's first meeting with Mr Walton took place at the office of the Mawson Group in the presence of Mr Spry. 102 In my respectful opinion, it is not easy to see how, other than in possibly minor respects, these matters could bear on the closeness of the relationship between the Mawson Group and LDD. On the basis of Mr Horne's evidence, it seems that the contact by Mr McCurry on or about 26 September 2013 was consistent with the ordinary means by which a referral from the Mawson Group was instigated. The circumstance that the meeting between Mr Franklin and Mr Walton took place at the office of the Mawson Group indicates a degree of closeness between the Mawson Group and Mr Walton, but otherwise does not seem particularly significant. In regard to these matters, I consider that the fair-minded observer would know that it would be commonplace for proposed administrators or liquidators to meet company directors before their appointment, and that those meetings often included the provision of preliminary advice to the distressed company. 103 It could perhaps be said that, by allowing Mr Spry to be present, Mr Franklin had permitted him to be privy to what he had been told by Mr Walton and to any preliminary advice which he had given on that day, and that this, possibly, indicated some favouring of the Mawson Group. However, ASIC has not made an allegation or submission to that effect and it would be inappropriate to act on the basis that it had. 104 I agree with ASIC's submission that the Mawson Group appears to have influenced the selection of the persons who, as liquidators, would investigate their own pre-administration conduct. The fair-minded observer can be regarded as knowing that it is commonplace for distressed companies to rely on their advisers for this selection. That may suggest, prima facie, that this is a matter of little significance. However, by analogy with the principle that litigants do not get to choose their judges, of which the fair-minded observer can also be taken to be aware, the observer might reasonably think that the Mawson Group's involvement as participants in pre-administration transactions, whose lawfulness would be investigated, and their role in influencing the appointment of those who would examine their conduct, were causes for disquiet. It would be natural for the fair-minded observer in these circumstances to think that, by reason of the Mawson Group's relationship with LDD, it regarded LDD as being possibly more amenable to its interests than others might be. Accordingly, I consider that this circumstance could add to the apprehension of the fair-minded observer. It is appropriate, however, to repeat in this context that ASIC eschewed any suggestion of incompetent or non-diligent performance of duties by the respondents. 105 Next, ASIC relied on what it said were shortcomings in the disclosures made by the respondents to the creditors of WCPL and WCQPL, both in the respective DIRRIs and more generally at the creditors' meetings. As will be seen, I agree with Robertson J that ASIC's appeal against the decision of the primary Judge concerning the alleged contraventions of s 436DA of the Corporations Act should be dismissed. Because of that conclusion, I do not accept ASIC's submission that the lack of full disclosure in the DIRRIs under s 436DA of the Corporations Act is a matter to be taken into account in relation to the issue of apprehended bias, whether on the basis that the reasonable bystander would know what should be disclosed under s 436DA or on the basis that a breach of that section contributes to the apprehension of bias. 106 However, ASIC's claim of incomplete disclosures was not confined to the alleged shortcomings in the DIRRIs on which it relied for that part of its claim. 107 ASIC made a number of contentions. First, that, in the DIRRIs dated 7 October 2013 for WCPL and WCQPL, the respondents had not disclosed that the administrators or liquidators may need to investigate pre-administration transactions, including transactions involving members of the Mawson Group, and that Mr Franklin's meeting with Mr Walton on 27 September had been held at the office of the Mawson Group in the presence of Mr Spry. Secondly, that, at the respective creditors' meetings of WCPL and WCQPL held on 15 October 2013, the respondents had not disclosed that Mr Kirzner of the Mawson Group had been a director of Tantallon until 24 September 2013 (a few days before the ASA was executed), that the shareholders of Tantallon were Mr Knapp and Mr Kirzner, that Lewton's principal place of business and registered office were the same as those for the Mawson Group, and the ultimate ownership of QHT. Thirdly, that, in the reports dated 29 October 2013 pursuant to s 439A of the Corporations Act prepared in respect of both WCPL and WCQPL, the respondents had not disclosed the control and shareholding of Tantallon, had not disclosed that the administrators or liquidators may need to investigate pre-administration transactions involving members of the Mawson Group, had not disclosed that Lewton's registered office and place of business were the same as those of the Mawson Group, had not disclosed the ownership and control of QHT, and had not disclosed that the debt assignment from WCQPL to QHT was a questionable assignment which had to be investigated. ASIC made complaints of a similar nature in respect of the disclosures made at the respective creditors' meetings held on 8 November 2013 at which the resolutions for the winding up of WCPL and WCQPL had been passed. 108 In my opinion, the fair-minded observer would not attach the significance to these omissions which ASIC imputed to them. Such an observer would, in my opinion, appreciate that, in the case of large and complex administrations, as was apparently the case in relation to both companies, it is not practical for the administrators at the creditors' meetings, and in particular at the first creditors' meeting called shortly after the administrators' appointment, to canvass all matters of this kind in detail. The fair-minded observer would also have regard to the statements of Mr Stone, who chaired the meeting of WCPL's creditors in Melbourne on 15 October 2013, that the administrators had sought legal advice in respect of the ASAs and were reserving their rights, that the Mawson Group had been involved in the pre-administration transactions, and that the administrators were alert to the prospect that some of the pre-administration transactions of WCQPL may be voidable in the event that that company went into liquidation. 109 In these circumstances, I would not conclude that a fair-minded observer might have attached any significance to the non-disclosures alleged by ASIC. 110 ASIC contended that certain of the statements made by the respondents at the creditors' meetings evidenced a benign view of the pre-administration transactions and supported an inference by the fair-minded observer that the respondents may not investigate these vigorously and independently. Counsel referred first to the statement of Mr Stone at the meeting of the creditors of WCPL on 15 October 2013 that, as Peloton (Tantallon) and Lewton were taking over projects with estimated revenue of $56 million but estimated costs to completion of $61 million, it appeared to be in the interests of creditors for the arrangements to continue. However, the fair-minded observer would also have noted that immediately after making that statement, Mr Stone said that the respondents had sought legal advice in respect of the ASAs and had reserved their rights. 111 Counsel also referred to the following exchange with Mr Franklin at the meeting of creditors of WCQPL on 15 October 2013: Creditor: What is the reason why you won't stand in the way of the ASAs? Chairman: At this time I don't have funds in the administration to continue to run the business or complete the projects. The ASAs were entered into before my appointment, and we have taken the view that if some contracts can be novated it will be a better outcome for the company. This is because there will be a reduction in employee entitlements, a reduction in sub-contractor liability, and a reduction in secured debt through the release of guarantees. These reductions are all to the benefit of the company. Creditor: If a client has been substantially underbilled, wouldn't it be better off to hang on to that project? Chairman: I will reserve my rights against the purchasers. On the face of it, it appears that the ASA is a benefit to creditors as it allows a resolution to the projects which would otherwise have not been available. Again, I doubt that the fair-minded observer would have attached the significance to these passages which counsel for ASIC imputed to them. On its face, Mr Franklin gave a plausible and reasonable answer to the enquiry about the ASAs and indicated that the administrators would reserve their rights against the purchasers under the ASAs. 112 Finally, ASIC referred to the concerns of some creditors raised at the respective meetings of creditors. At the first meeting of creditors of WCPL held on 15 October 2013, Mr Stone, who was the chairperson, reported that the Mawson Group had worked with WCPL on the establishment of Lewton and Tantallon (then Peloton), and on the assignment of the debt of $18.9 million from WCQPL to QHT. In the questions which followed, the following exchange occurred: Creditor 1: Has the transfer of a debt for $18m to QHT Investments Pty Ltd (QHT) been investigated? How did it get to $18m? Chairman: Yes. The Queensland operations were apparently profitable and supported the New South Wales and Victorian operations via an intercompany loan account. A debt for $18.9m owed by this company to Walton Qld was purchased by QHT, a company associated with Mawson in September 2013. Creditor 1: Who set up QHT? Chairman: The sole director of QHT is Mr Pat McCurry of Mawson Group. Creditor 2: Who referred Craig Walton to you? Chairman: Mr McCurry. Creditor 2: Have you dealt with Mr McCurry before? Has Mawson done anything like this before? Are you comfortable with your relationship with Mawson? Chairman: Yes, Mawson are corporate advisors and in the business of restructuring. We have previously accepted appointments from Mawson. Insolvency practitioners are able to accept referrals from other professionals. The Administrators see no risk to their independence and if an issue arises there are procedures available to deal with any perceived conflict and legal advice will be sought. As can be seen, it is evident that these creditors were raising questions about the respondents' relationship with the Mawson Group. Questions asked by other creditors indicated that they had concerns about the possible unlawfulness of conduct of Mr Walton and of the pre-administration transactions. 113 The meeting considered proposals for the appointment of administrators other than the respondents. First, a proposal that the firm of Jirsch Sutherland be appointed as administrators failed (8 creditors in favour, more than 20 against and 2 abstentions). A proposal that the firm of Rodgers Reidy Chartered Accountants be appointed administrators also failed, but only after a poll was taken. Forty-nine creditors, in respect of debts totalling $5.9 million, voted in favour; 23 creditors, in respect of debts totalling $27.1 million, voted against; and 5 creditors, in respect of debts totalling $2.7 million, abstained. Those voting against included QHT with its debt of $18.9 million. Mr McCurry was the sole director of QHT at that time and accordingly could decide how it voted. The resolution in favour of Rodgers Reidy required a majority both of the creditors voting and in the value of the debts owed. Mr Stone, as chairman, could have used his casting vote in favour of Rodgers Reidy, but chose not to, referring to the work which the respondents had already performed and to the interests of the creditors in having the same administrators appointed to both WCPL and WCQPL. 114 It is not clear from the minutes of the meeting whether the proposals for the appointment of alternative administrators were prompted by concerns which the creditors had about the position of the respondents in relation to the Mawson Group, but the minutes do not disclose any other cause for dissatisfaction by the creditors with the respondents. 115 At the second creditors' meeting of WCPL on 8 November 2013, it was apparent that some creditors were still concerned about the lawfulness of the pre-administration transactions, but no questions were raised about the respondents themselves, and the resolution that they be appointed liquidators of WCPL was carried on the voices. 116 At the first creditors' meeting of WCQPL held on 15 October 2013, the questions from creditors indicated an underlying concern about the lawfulness of the pre-administration transactions and of Mr Walton's conduct. However, no creditor raised a concern about the respondents' appointment. A proposal that the respondents be replaced by Rodgers Reidy Chartered Accountants failed on the voices. 117 At the second creditors' meeting of WCQPL held on 8 November 2013, one creditor asked questions which indicated a concern about the respondents' relationship with the Mawson Group: Creditor: In the DIRRI you advised that you met with Mr Walton and that this matter came to you through Mawson. Chairman: Yes, Mawson refer us work. Creditor: Apparently Mr Walton consulted with Mawson months ago. Did you have discussions with Mawson prior to Mr Walton approaching you? Chairman: I had a discussion with Mawson, however this discussion was very limited in detail and the name of the company was not disclosed. The discussion was in the context of arranging the first meeting with Mr Walton on 27 September 2013. Creditor: Did you provide a copy of the report to Mawson before it was released to creditors? Chairman: No. Creditor: In the report it paints a glowing light on Mawson. Chairman: I don't agree that the report puts a glowing light on Mawson or Mr Walton. Creditor: In the executive summary of the report you advised a lot of work had been done and projects were transferred for the benefit of unsecured creditors. I think it was done to minimise secured creditors, as Mr Walton signed personal guarantees for the secured debt. Chairman: The secured creditors generally supported the ASAs. The reduction of the secured debt exposure is a benefit to the company as a whole. There were also other direct benefits to reduce unsecured creditor debts owed to sub-contractors and also employee entitlements. In regard to the ASAs, I have reserved my rights. In liquidation they may be deemed as uncommercial and voided by a liquidator. It is also to be noted that one creditor drew attention to the presence of Mr Spry from the Mawson Group as an observer at the meeting, and asked that he be removed. This appears indicative of some sensitivity about the role of the Mawson Group, although not necessarily indicative of concern about the respondents' independence from that group. However, the resolution that WCQPL be wound up and that the respondents be appointed its liquidators was carried on the voices. 118 Mr Dang, an officer from ASIC, has deposed that ASIC has also received expressions of concern about the appointment of the respondents as liquidators to the two companies. However, given the confidentiality said to attach to these communications, Mr Dang did not produce them to the Court. In that circumstance, I consider it inappropriate to attach weight to Mr Dang's report of the communications. 119 Counsel for the respondents referred to the statements made by each of Mr Stone and Mr Franklin at the respective meetings indicating the intention of the respondents to investigate the pre-administration transactions. I have referred to some of these already. The remainder to which counsel referred were of a relatively routine kind and it is not necessary to quote them for present purposes. I agree with counsel that the fair-minded observer is likely to have accepted those statements at face value, and that they militate against the reasonable apprehension which ASIC attributes to that observer. 120 Counsel for the respondents submitted that none of the creditors of WCQPL had raised any concern about the respondents' appointment as liquidators and that the creditors could be regarded as "a good proxy" for the reasonable bystander in this context. This submission is literally true, but it overlooks, insofar as it concerns the creditors of WCQPL, the questions raised by the creditor at the meeting on 8 November 2013 quoted above, which indicated that that creditor at the least had concerns about the respondents' position. Further, if one accepts the submissions that creditors are "a good proxy for the reasonable bystander", then the questions raised at the meetings of WCPL on 15 October 2013 and of WCQPL on 8 November 2013, together with the unsuccessful attempts to have the respondents removed as administrators of WCPL, tend to support ASIC's contention that the fair-minded observer not only might have, but did have, a reasonable apprehension that the respondents might not discharge their duties independently and impartially. Thus, I regard this matter as supportive of ASIC's contentions. 121 ASIC led evidence at the trial of a creditors' meeting in relation to the administration of a company formerly known as Redset Group Pty Ltd (Redset) which occurred on 5 September 2013. Mr Franklin was the administrator of Redset. The administration of Redset had been referred to LDD by the Mawson Group. The minutes of the meeting on 5 September 2013 concerning Redset indicate that the solicitor for one creditor raised forcefully issues about the independence of Mr Franklin. Subsequently, a proposal that Mr Franklin be replaced as administrator was lost. ASIC submitted that the circumstances pertaining to Redset were similar to those pertaining to WCPL and WCQPL, and that regard could be had to the views expressed by the solicitor at the meeting in considering the apprehension of the hypothetical reasonable fair-minded observer. I agree that this may be so in a general way but, given that the Court is in no position to determine the similarity or otherwise of Redset's circumstances with those of WCPL and WCQPL, doubt that it is a matter to which it is appropriate to give much weight. I decline to do so. 122 ASIC drew attention to the Code of Professional Practice for Insolvency Practitioners (the Code) published by the Insolvency Practitioners Association of Australia and, in particular, to Chapter 6 of the Code. That chapter emphasises the importance of insolvency practitioners being, and being seen to be, independent in the discharge of their duty and the importance of practitioners considering the question of independence at the time of accepting an appointment. 123 Counsel made submissions concerning the circumstances of this case by reference to the contents of the Code. Those contents reflect the principles which have already been canvassed in these reasons and appear to be drawn from some of the authorities to which reference has already been made. That being so, it is unnecessary, in my opinion, to address separately the parties' submissions concerning the Code.

Summary 124 In summary, I consider that there is a conflict which is more than theoretical between the interest of LDD in not jeopardising the prospect of further remunerative referrals from the Mawson Group, on the one hand, and the proper discharge of their duties as liquidators of WCPL and WCQPL, on the other. The reasonable fair-minded observer would perceive this conflict. 125 I also think that a reasonable fair-minded observer might reasonably apprehend that, because of the respondents' interest in not jeopardising future income, they might not discharge their duties with independence and impartiality. I note in this respect the observation of Spigelman CJ at [26], 510 in McGovern that "[when] a relevant conflict of interest is established the reasonable apprehension follows almost as of course". 126 The circumstance that the Mawson Group was influential in the appointment of the respondents as administrators of WCPL and WCQPL (which led to their appointment as liquidators) would, in my opinion, add to the apprehension of the reasonable fair-minded observer. The circumstance that creditors of both WCPL and WCQPL asked questions indicating concerns about the respondents' relationship with the Mawson Group allows this conclusion to be drawn more confidently.

The claimed contravention of s 436DA 127 As I have already indicated, I respectfully agree with the reasons of Robertson J on this part of ASIC's claim. This ground of appeal should be dismissed.

The appropriate relief 128 It remains to be considered whether effect should be given to the conclusions set out above by ordering the removal of the respondents as liquidators, as ASIC seeks. Such an order is likely to be productive of considerable inconvenience and expense in the liquidations. It seemed to be common ground that these are large and complex liquidations. The respondents were administrators from 3 October 2013 and the liquidations have now proceeded since 8 November, a period of more than eight months. The respondents must now have carried out a considerable amount of work and have acquired significant knowledge about the affairs of the two companies. Of course, not all that work or knowledge would be wasted in the event that the respondents were replaced but, nevertheless, it is appropriate for the Court to consider that an order for the removal of the respondents at this stage will have disruptive and costly effects. 129 However, there does not appear to be any practical alternative. It is likely that the investigations of the pre-administration transactions will be a significant aspect of the two liquidations and that the respondents' conflict of interest will pervade that investigation. It was not suggested at the hearing that there were practical means by which the conflict could be "quarantined". 130 It is unfortunate that the respondents did not recognise the conflict at the time that issues about their relationship with the Mawson Group were first raised. 131 In my opinion, the Court should make an order with prospective effect for the removal of the respondents as liquidators of WCPL and WCQPL. A number of consequential orders are also likely to be appropriate. Accordingly, I would defer the making of final orders at this stage and instead direct that the parties confer and file and serve minutes of all the orders necessary and appropriate to give effect to the order of removal.

Proposed order 132 I would grant ASIC leave to commence the appeal against the fourth and fifth respondents (WCPL and WCQPL). I would defer for a short time making the order for the removal of the respondents and would direct the parties to confer and, by no later than 24 July 2014, to file and serve minutes of the orders necessary and appropriate to give effect to the conclusion that the respondents should be removed as liquidators of Walton Construction Pty Ltd and Walton Construction (Qld) Pty Ltd. I certify that the preceding ninety three (93) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White.